Fed’s policy pause sets stage for broad overhaul: Report
NEW YORK When Federal Reserve policymakers last month put a three-year rate-hike campaign on hold and backed ending a yearlong push to shrink their US$4 trillion (S$5.4 trillion) balance sheet, they cited increased risks to US economic growth and the need for more time to sort through the data.
But whether by design or by happenstance, their policy pause effectively cleans the central bank's slate ahead of what could be a massive overhaul of how they manage the US economy, including what tools they use and how they communicate to the public.
Behind the Fed's decision to spend the next year rethinking how it should go about ensuring that prices remain stable and employment plentiful are some of the same structural economic changes that led the US central bank to put its current policy on hold in the first place.
The connections between the Fed's new "patient" stance on policy, its decision to leave its balance sheet bigger than it had previously anticipated, and what looks set to be a tough debate over a possible new policy framework were on full display for the first time at a conference on monetary policy in New York on Friday.
There, the influential chief of the New York Fed, Mr John Williams, nodded to the US economy's new normal, where unemployment is plumbing its lowest levels in nearly 50 years, but inflation is barely touching the Fed's 2 per cent goal.
And though the Fed needs to guard against a surge in inflation, Mr Williams said, "we must be equally vigilant that inflation expectations do not get anchored at too low a level."
San Francisco Fed President Mary Daly, also speaking at the conference, concurred.
"Inflation has been below our target for a long time," Ms Daly said.
"Complacency can go both ways and it is important to be vigilant on both sides of the target, not just on the upside but also on the downside."
One central question in the Fed's policy rethink is whether the Fed should react to periods of low inflation by allowing inflation to run hot for a time, Fed vice-chair Richard Clarida said in a speech that outlined the scope of the Fed's broad review.
Such a strategy could mean the Fed seeks to maintain an average rate of 2 per cent inflation over any given period, rather than its current strategy of targeting its 2 per cent level without regard to whether it has been able to meet that goal so far.
Still, it was clear from remarks by policymakers at the event that not all were convinced of the need to change the Fed's inflation-targeting, and the debate, which kicks off officially with an event today in Dallas, will be robust.
A Fed economic report released on Friday showed why concerns about weak inflation have suddenly taken root.
After raising rates amid faster-than-expected growth through last year, the Fed said a series of developing risks likely began slowing the economy late in the year and into 2019.
That included weakening consumer spending and business investment, risks from a global slowdown and trade tensions, "deteriorated" risk appetite among investors, and even a nick to gross domestic product from the partial government shutdown. - REUTERS